The Brazilian Financial Crisis


Code : ECC0002

Year :

Industry : General Business

Region : Brazil

Teaching Note:Not Available

Structured Assignment : Not Available

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Background Brazil, one of the largest economies of the world, has a large wealth of natural resources. The economy is diversified with well-developed agricultural, mining, manufacturing and service sectors. It is the largest producer and exporter of coffee. And so the impact of coffee on the country's economy was greater than that of sugar and gold. Coffee was introduced in Brazil in the early 18th century. During the 1820s and 1830s, coffee was Brazil's major export item. The other export products were sugar, cotton, tobacco and cocoa. Hence, the agricultural goods dominated the export sector....

The 'Real' Plan The new Minister of Finance developed a stabilization program, called the 'Real' Plan. It was launched in January 1994. This plan was conducted in three phases. In phase one, the government tried to adjust the short-term fiscal deficit of the country. There were tax increases and cuts in the expenditures. An Emergency Social Fund was created, which helped to balance the nominal public deficit....

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The IMF Package On October 28th 1998, the Brazilian government disclosed details of its $84 billion fiscal austerity package plan. According to this plan, Brazil planned to save almost $24 billion in the year 1999. This would be achieved through tax increases, spending cuts and other fiscalmeasures. The plan won praises from the IMF and the Clinton administration. This plan was designed in view of the aid, which Brazil expected to get from the IMF later that year. On November 13th 1998, the IMF approved a three-year financial rescue package of $41.5 billion to Brazil....

After the Float of the real Francisco Lopes was appointed the new President of the Central Bank. He immediately devalued the real by 8% and the value of the real ended at 1.32 per dollar.23 The devaluation announcement did not slow the capital outflows, which continued at the rate of $1billion per day.24 On January 15th 1999, the real was allowed to float freely against the dollar. By March 1999, the value of the real had depreciated by around 40%25 and the exchange rate was at 2.1 reals per dollar.26 Few months after the change in the exchange rate regime, Brazil's economy began to recover. For 1999 the GDP increased to 0.8% and for 2000 it grew to 4.4% (Exhibit 6). The exchange rate stabilized and the current account deficits declined (Exhibit 7). The inflation for the year 1999 was 9% and for 2000 it was 6%.27 In 2000, Brazil accumulated a trade deficit of $697 million....

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